The European Commission has announced plans to overhaul the VAT system for intra-community supplies of goods within the EU. The current interim system taxes supplies based on the origin principle, but a new definitive system beginning in 2019 will reverse this and tax supplies based on the destination principle instead. Under the new system, a supply from one country to another will be taxed in the destination country rather than the origin country. The Commission also proposes new rules for certified taxable persons and a "one-stop shop" for suppliers to account for VAT in other member states.
1. Briefing paper: EU Commission
announces major overhaul of VAT system
The European Commission has published draft legislation in the form of a draft Directive aimed
at implementing a number of short-term measures to combat VAT fraud and (from 2019) a major
overhaul of the VAT system in relation to the intra-community supply of goods. Originally, the
preferred VAT system for Europe was intended to be a system based on the concept of taxation
in the supplier’s country (the origin system). The proposed new measures will culminate in a
system based on the concept of taxation in the country of consumption (the destination
system).
What’s the issue
The European Commission has announced that, as part
of its ‘future of VAT’ programme, it has introduced
draft new legislation that will, if adopted, see the
European Union adopt a system of indirect taxation
which is based on the destination principle. This is a
complete reversal of the original intended system which
was for one based on the origin principle. The original
concept was to tax supplies of goods in the country
where the supplier belongs. For example, where a
supplier in the UK supplied goods to a customer in
Germany, that supply would be subject to UK VAT at
the prevailing UK VAT rate at the time of supply.
Unfortunately, for both political and economic reasons
that original concept could not be implemented. In
1992, when the single market was adopted, interim (or
transitional) measures were introduced until such time as
the political and economic issues could be resolved. The
transitional system has been in force ever since.
Interim system
From January 1993, the VAT system in the European
Union has operated under a transitional regime. The
regime provides an exemption from VAT in the country
of origin with the VAT registered customer in another
Member State being required to account for VAT on the
acquisition of the goods in his country through the
payment of acquisition VAT. In most cases, such
acquisition VAT then being reclaimed by the acquiring
taxable person to the extent that the goods were used or
to be used by him in making taxable supplies.
The system relies on the suppliers of goods to VAT
registered businesses in other Member States completing
a recapitulative statement (known in the UK as the EC
Sales list) and the customer making accurate acquisition
VAT declarations on its own VAT returns.
The proposed new system
From 2019, the Commission proposes to introduce
the ‘definitive’ VAT system throughout the EU. The
new system is the complete reverse of the original
proposed system and will tax the supply of goods in
the Member State of consumption. For example,
where a UK business supplies goods to a German
customer, the supply will be deemed to be a German
supply of goods taxable in Germany.
The exact detailed technical rules for how the new
system will be operated will be provided during 2018.
The current proposal is merely to set the direction of
travel and provide a framework. In addition, further
changes will also be needed to the arrangements
between Member States in relation to administrative
cooperation and in relation to IT developments.
Intra-Union Supplies
The new system will introduce a new concept of
supply known as an intra-union supply. This will be a
single event and will replace the existing two event
procedure (ie the exempt supply in the Member State
of departure followed by a taxed acquisition in the
Member State of destination). Such supplies will be
deemed to take place under the ‘place of supply’ rules
in the Member State of arrival of the goods.
Liability to pay VAT
Under the new system, the supplier will be required to
pay any VAT due in the Member State of destination
unless the customer acquiring the goods is a certified